Participation Exemption - Mechanism

Mechanism

Participation exemptions generally limit taxation of a parent company (corporation) in its country of organization on income from subsidiaries. This reduction of taxation generally has some limitations as to the nature of income on which is tax is reduced and the minimum level and period of ownership of the subsidiary. Participation exemptions are only relevant in countries which tax companies on their income from sources outside the country.

Some systems (e.g., The Netherlands) provide that dividends from a subsidiary meeting the minimum ownership requirements is wholly exempt from taxation. Some systems provide a partial exemption. A few extend this treatment to interest or other forms of participation.

Most systems require that the parent company must own some significant portion (e.g., 25 percent) of the equity of the subsidiary in order to qualify for participation exemption. In addition, most systems require that this ownership either have already continued for a minimum period at the time the income is received or continue beyond the date of such receipt until the minimum period is reached. The minimum ownership period is often one year.

A few systems require an advance ruling by tax authorities in order to benefit from participation exemption. This requirement, however, is becoming less prevalent.